Pioneer Cement Limited

Pioneer Cement Limited (PIOC) is a mid-tier cement manufacturing located in the Chenki district near Sargodha, Punjab catering to the demand in the northern zone of the country. The company was incorporated in 1986 as a public listed company as part of the Noon Group of Companies, a prominent business group with subsidiaries including Nurpur Foods, Noon Sugar Mills and Noon Pakistan. Until 2009, the group held the majority stake of the company, after which 24.6 percent (49.1 million shares) of the company's shares were bought by Vision Holdings Middle East Limited (VHMEL) registered in British Virgin Island.
With the current capacity of nearly 2 million tons, Pioneer has about 4 percent share based on the overall (pre-expansion) industry capacity, about 4.6 percent market share in the north, and 3 percent in the overall industry dispatches. The company commissioned its first production line in 1992 with a production capacity of 2,000 tons of clinker per day (approx. 0.6 million tons annually) later expanding it to 2,350 tons per day (approx. 0.7 million tons annually) in 2005. A second production line was in 2006 with a capacity of 4,300 tons of clinker per day (approx. 1.3 million tons annually).
Ownership and expansions
After being sold to VHMEL, the company holds 47 percent of Pioneer's shares as at June 2017. The rest of the shares are distributed amongst modrabas and mutual funds (12%), insurance companies (2%), joint stock companies (9%), banks DFIs (4%) in small shares. The public held 15.31 percent of the company's share when FY17 wrapped up.
Much like the rest of the industry, Pioneer also announced a Greenfield expansion of 9,000 tons per day (approx. 2.7 million tons annually) of in the Nooriabad Industrial Area in Jamshoroo Sindh. The plant will be accompanied by a 12 MW of waste heat recovery unit and 24 MW of coal fired power plant. The financial arrangements for the plant-of Rs 25 billion-were arranged through a foreign lender. The expansion would take total capacity to 4.5 million tons. Together with the new expansion, the company is developing the Galadari Cement Limited plant of 3,000 tons per day (approx. 0.9 million tons) in Hub, Balochistan.
Operational and financial performance
Pioneer has maintained a mid-level position in the industry through the years with a 2-3 percent market share and maintaining 4-5 percent in the north zone where the competition tends to be tough. Due to old plants and machineries, the company's capacity utilisation had remained between 50-60 percent through the years. In 2017, the company introduced a new cement mill to existing plants that allowed capacity utilisation to grow to 77 and 78 percent in FY18 and FY17-of course, strong demand is also a dominating factor.
The industry has seen demand climb encouragingly over the past two years as the economy was in expansion mode, and the then-government was spending on development infrastructure. Meanwhile, CPEC projects and Gwadar construction were picking up steam and the overall real estate demand was booming as economy grew-which meant more housing societies, and more commercial development.
In that scenario, demand for cement was strong-cement dispatches in FY18 grew by 14 percent and domestically by more than 15 percent. Pioneer saw its volumetric sales grow by 15 percent and 25 percent in FY16 and FY17. Exports overall had been falling due to the pressures in the Afghan market and the South African market but started to slightly move toward recovery during FY18. Pioneer's exports grew by 92 percent during the year likely due a turn-around in land and seaborne exports.
Cement manufacturers usually adjust sales mix according to domestic demand, preferring to sell locally where they fetch higher prices, rather than abroad where they have to often take a price cut to compete. Towards the end of 2017, price competition in the north grew as expansions started to come through, which resulted in cement manufacturers in the north facing lower retention prices. Cement companies in the north experienced lower prices per ton overall. For Pioneer, its own domestic sales dropped by 3 percent which resulted in a revenue drop.
Meanwhile, costs were not favourable either for the industry as coal prices globally moved upward as well. For northern players, costs tend to be higher due to freight and inland transportation expenses. The company installed a waste heat recovery unit in 2016, which may have shielded it from some of the rising power and energy costs, but dependence on imported fuel always adds to the riskiness not only because of the costs of the fuel but also the foreign exchange involved and the potential volatility of it. That is what happened during FY18- as the rupee weakened, imports suffered. These were the causes for not only a fall in revenue in FY18 (5%) but a dramatic fall in margins-from 42 percent to 28 percent between FY17 and FY18 for Pioneer.
The other significant change recently was in finance costs, which rose due to the increase in borrowing for the waste heat recovery unit. These costs will continue to remain substantial especially when it's time to start paying for the financing of the expansions.
First quarter FY19 and future outlook
The bleeding continues into FY19. The company has experienced a slowdown in demand, and incurred higher costs due to international coal prices as well as rupee depreciation. The company also experiences high fuel and power costs as well as the costs for packing materials. Margins have plummeted to 23 percent in 1QFY19 against a reasonable 34 percent-which were themselves pretty low by FY16 and FY17 peak standards.
There is some good news on the demand front. Market access to unexplored exporting destinations is available. With the expansion in the south, the company will have one foot in the north and another in the south-with opportunities to export to the southern market locally and be able to export at lower transportations costs via sea. With new grinding mills, the company has earlier managed to improve the productivity of its existing facilities and market share is expected to grow to 5 percent.
There was some speculation that demand would slowdown as economy was entering an austerity drive, and indeed, it did. PSDP funding was cut; many projects under CPEC and Gwadar were cancelled. Higher interest rates, which are expected to further increase translates to higher borrowing costs for investors. Overall the real estate also started experiencing a slump-mostly in the commercial development segment. On the other hand, CPEC development with approved projects and construction in Gwadar continue while construction in the private housing societies has seemingly not died down either. Moreover, the new government under Imran Khan plans on bringing a million houses per year during the PTI tenure. By BR Research estimates, that's around 20 million tons of additional cement demand that can be nabbed, if the plan materialises. The impending dam construction will also bolster demand.
Coal prices, rupee parity against the greenback, and local retention prices will play a directional role toward the company's future bottom-line and need to be tackled with strategic risk planning.

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Pioneer Cement: First Quarter

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Mn Rs                     1QFY19    1QFY18    YoY

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Sales                      2,232     2,421    -8%

Cost of Sales              1,707     1,604     6%

Gross Profit                 524       817   -36%

Distribution cost             42        30    39%

Administrative expenses       28        21    33%

Other operating expenses      47       167   -72%

Other income                   9        17   -45%

Finance cost                  61        20   209%

Profit before tax            355       596   -40%

Taxation                      97       179   -46%

Net profit for the period    258       417   -38%

Earnings per share (Rs)     1.14      1.84   -38%

GP margin                    23%       34%   -30%

NP margin                    12%       17%   -33%

Production (tons)        332,855   337,918    -1%

Domestic Sales (tons)    311,538   324,116    -4%

Exports (tons)             15.75     12.74    24%

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Source: Company accounts

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Pattern of Shareholding (as on June 2018)

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Categories of Shareholders                         Share

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Directors and their spouse(s) and minor childre    0.01%

Associated Companies, and related parties          0.23%

NIT and ICP                                        0.02%

Banks, development finance institutions,           3.59%

insurance, non-banking finance companies etc.

Insurance Companies                                2.25%

Modrabas and Mutual Funds                         11.68%

Public Sector Companies                            0.08%

Foreign Companies                                 53.23%

Vision Holding Middle East                           47%

Joint Stock Companies                              8.74%

Public                                            15.31%

Others                                             4.96%

Total                                               100%

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